Robert Mathu (l) and Pierre Celestin Rwabukumba of CMA filling the trading board during the launch of Rwanda over the Counter market in 2008 . Photo B. Hitimana.Ripe opportunities for Rwandans as more Kenyan firms eye Kigali

Rwanda Stock Exchange (RSE), the local market on which long term capital is raised through bonds and equities trading, is bracing for automation, a move that will see trading of financial securities going electronic, making investing through the capital markets much easier.

The Capital Markets Authority (CMA), which regulates the stock exchange, says it will use a generous part of its Rwf1.5 billion budget for the fiscal year July 2012-June 2013 to procure and install an electronic trading system abolishing the current manual trading at the local nascent bourse.

The automation of the RSE is expected to help Rwandans mobilize long term savings as well as propel the linking of RSE with similar bourses in the region. It will also encourage foreign companies to list shares in Rwanda, opening up opportunities for the local equities investors to buy into foreign firms.

Robert Mathu, the Executive Director of the CMA, says automation is a priority because once RSE is virtually linked with other stock exchanges in the East African Community (EAC), there will be added activity on the local bourse. The Uganda Securities Exchange (USE), in the capital Kampala, the Dar es Salaam Stock Exchange (DSE) of Tanzania, and the Nairobi Stock Exchange (NSE), in Kenya, are all automated. “We are still preparing for automation of the stock market as a whole. The immediate priority was the depository which the central bank has implemented and that’s why domestic securities are in electronic form. This is the settlement or the payment side,” says Mathu.

“The next step is for the depository to integrate with the rest of the region to facilitate efficient cross border transactions. Thereafter, we shall engage in automating the trading platform at the RSE.”

Electronic trading, or e-trading, will accelerate the speed at which transactions are processed on the domestic stock market. In contrast to an older floor trading and phone trading system, e-trading is a method of trading securities such as stocks, and bonds electronically, in an Information Technology (IT) enabled virtual market. The current manual trading system discourages companies from cross listing on the RSE.

Experts say the use of electronic trading has important implications, including reduced transaction costs; greater liquidity since there are more buyers and sellers and increased efficiency of the markets; greater competition as it removes barriers within the industry as a trader does not need to go through a broker or pass orders to a broker on the exchange floor. An electronic platform also brings about increased transparency. It is easier to find out the price of stocks and bonds when pertinent information is flowing around freely, electronically.

According to Dr. James Ndahiro, an economist and former RSE Chairperson, there are several advantages but three are more important. He says, “Electronic trading improves the level of liquidity in the market as it gives the wide range of stakeholders, wherever they could be in the region, the chance to trade in the wider market.”

“Secondly, it provides a basis to gauge the index of the exchange and this reflects the level of economic activity in a country. This, in turn, enables the process of decision making,” Dr. Ndahiro further explains.

“Number three is that it removes unnecessary delays. Transactions are quicker as people are able to trade without going through a broker,” Dr. Ndahiro adds, hastening to explain that brokers have nothing to worry about.

“They [brokers] will actually not lose out. Instead, they will get many more clients because of the much more information flowing freely because of an electronic trading platform.”

Shehzad Noordally, the Chief Executive Officer of Continental Discount House (CDH) Capital Ltd, a locally registered brokerage firm, says, “we are really happy” that they are planning to automate the trading platform. Noordally, among other things, is happy that automation “will lower costs especially once we have the system on a laptop.”

“Automation may also increase efficiency of the market as brokers and even clients will not be able to manipulate market prices. In addition, competition will improve as we will all be able to get a better deal,” Noordally further says. “Automation is more efficient and it will boost confidence in the market because, then, the public will know there will be fewer errors once the system is managed electronically.”

Rwanda has the youngest capital market in East Africa having launched it on January 31, 2008, with introduction of the bond market mainly driven by the government bonds and later one corporate bond issued by the Commercial Bank of Rwanda (BCR). By then, Rwanda did not have a stock exchange; it was operating an Over the counter( OTC) market where trading of bonds was allowed to take place even outside the trading floor but transactions could be recorded as soon as a sale was made. Rwanda started a temporary equities market in June 2009 with the cross listing of shares of Kenya Commercial Bank Group (KCB Group) on the OTC market.

KCB was initially listed on NSE in Kenya and moved on to cross list on USE and DSE. KCB is East Africa’s largest bank in terms of assets and has branches in Rwanda, Tanzania, Uganda, and South Sudan in addition to its home base Kenya, East Africa’s largest economy. In November 2010, the Nation Media Group (NMG), another Kenyan company doubling as East Africa’s largest media house with presence in Rwanda, Uganda and Tanzania, cross listed shares in Rwanda, in addition to Uganda and Tanzania, becoming the second company to offer shares to the Rwandan equity investors.

But Rwanda had not yet established a fully fledged stock exchange as there was no local company listed on the OTC market. Also, the legal framework to facilitate listing of local companies and establishment of the stock exchange, and the regulator was still lacking.

However, the situation changed on January 31, 2011 when a local brewery Bralirwa went public, becoming the first Rwandan company to offer shares to the public through the capital markets.

Bralirwa is Rwanda’s leading brewery producing beer and carbonated soft drinks. Bralirwa’s Initial Public Offering (IPO)—sale of shares to the public for the first time, ignited the launch of a fully fledged local bourse on January 31, 2011.

Bralirwa was then followed by Rwanda’s largest commercial bank, Bank of Kigali (BK), whose shares were listed on RSE on September 1, 2011, becoming the second local company to raise capital through the capital markets. Today, RSE embraces four listed companies—two Rwandan and two from Kenya. Currently, the equities market has grown bigger compared to the bond market.

Share Price changes

Bralirwa’s shares started selling at Rwf136 per share on the primary market on January 31, 2011 but as of last week, each share had gone up to Rwf370, indicating a tremendous increase driven by the performance of the company. Since the company listed shares on RSE, it has continuously reported super profits despite the increasing competition in the alcoholic and soft drinks beverages market. This increase in profits has thus influenced the investor decision while buying and selling their stocks. But BK shares have not enjoyed a rapid price appreciation as Bralirwa shares have. BK shares were selling Rwf125 each on the primary market but they have moved to Rwf137 each on the secondary market. This slight increase is fueled by the company’s consistent profits and expansion nationally and regionally but investors are cautious to stock BK shares because of the increasing competition in Rwanda’s banking sector, which is attracting largest Kenyan banks such as Equity bank and I&M which are the latest to set foot in Rwanda after KCB and FinaBank. Also, the reducing profit margins from the corporate sector which has been gulping most of the loans from banks pose a danger to future profitability of the banking sector which could be affecting BK’s share price, as the leading commercial bank. Rwanda’s corporate sector is facing tough competition as a result of price wars, thus lowering profitability of some companies especially telecoms. The Kenyan companies listed in Rwanda don’t have much influence on RSE because their price is determined on their main stock exchange in Nairobi.

More firms eye RSE

Despite the fact that local companies have shied away from listing on the stock exchange saying that they are not ready, regional companies, especially Kenyan ones, are eager to continue boosting the Rwandan bourse. Those companies, says Mathu, include Equity Bank, one of the most profitable companies in East Africa, which recently made entry into Rwanda in addition to Tanzania, Uganda and South Sudan, KenoKobil Ltd, Kenya’s top lubricants marketer which operates in Rwanda as Kobil with numerous fuel filling stations, and Centum, an investment company with shareholdings in many other companies. Mathu says that when these companies finally cross list on RSE, investors in Rwanda will have an opportunity “to distribute their risks,” and in addition to get more returns on investments.

Equity Bank is reportedly the largest bank by customer base in Africa, now has a complete EAC presence after opening branches in Rwanda, in the fourth quarter of 2011. It is currently eying Burundi. From a customer base of 27,000 in 1993, the bank is now home to 7.8 million accounts accounting for over 50% of all bank accounts in Kenya.

In July, the bank reported that it continued to maintain its growth momentum with the profit before tax growing by 29% to close at Kshs 7.62 billion in the six month period that ended June 30, 2012 despite the challenging micro-economic environment characterized by high inflation, interest rates hikes and foreign exchange volatility. Since 2006, Equity Bank’s shareholder value has grown creating immense wealth for shareholders. As per the bank’s audited financial report for the year ended December 31, 2010, shareholders’ equity was valued at approximately US$336.7 million.

On the other hand, KenolKobil which engages in the importation of crude oil for refining, trading, storage, and distribution of refined and other petroleum products, has an expansive business presence in Kenya. KenolKobil markets and sells various white fuels, including motor spirits, automotive diesel, industrial diesel, bitumen, and kerosene; motor fuels; Liquid Petroleum Gas (LPG) also known as K-gas, and many other petroleum products. The company also supplies jet A1 aviation fuel variant to international and local airlines. It operates in Kenya, Uganda, Tanzania, Rwanda, Zambia, Ethiopia, Burundi, Zimbabwe, and Mozambique.

Its main brands Kobil, Kenol and Castrol dominate the Kenyan market. In June, the company shares in Nairobi reportedly jumped by 9.1% to Kshs15.55 by the close, the highest level since at least May 1997. The volume of trading was, reportedly, more than two and a half times the stock’s three-month average.

Centum Investment Company Limited (Centum) is the largest quoted investment company in East Africa listed on the NSE. With over 38,000 shareholders, it is both a provider and manager of funds, and positions itself as an investment channel through which other investors are able to access diversified investments and management expertise for a superior return.

Its portfolio is currently valued in excess of $140 million and consists broadly of investments in private equity, listed equity and real estate. The private equity portfolio is the largest asset class, with notable investments in the financial and beverage sectors. Centum is organized in three distinct business lines; Private Equity, Quoted Private Equity, Real Estate and Infrastructure.

Mid last year, the company officially announced substantial divesture of its 22% shareholding from the NSE, so as to raise funds to invest in other opportunities. At the time, Centum CEO James Mworia, confirmed the move saying; “We acquired the 22% equity block in Carbacid for US$4.9 million in May 2009. Over the two years we have held this investment it has generated US$14.2 million in dividends and disposal proceeds. We have now developed an attractive pipeline of opportunities across Sub-Saharan Africa and it is important that we rank the return potential of our existing investments against that of potential investments.”

Centum, which is listed on the NSE and the USE, has reportedly maintained a strong track record of delivering market beating returns. Between March 2009 and September 2010, it increased its asset base from $75 million to $144 million and has delivered a 146% return to its shareholders with its market capitalization increasing to $163 million.